Foreign trade: Crippling imports

Planners and administrators tend to hit panic buttons when key economic indicators begin to move out of control. Double digit inflation excites this kind of reaction. So do mounting budget deficits which show the Government deep in the red. Curiously, there hasn't been any excitement about one particular statistic which reflects just as surely the grim state of the economy.

After four years of spectacular growth, India's foreign exchange reserves are standing still. Worse, they may well be perched on the edge of a crippling downturn which will make economic revival even more difficult than it already seems. Latest figures show that India's foreign exchange reserves were at Rs 5,260 crore lower at the end of February than at the start of the last financial year in April 1979. It was the first time this has happened since 1973-74 when the reserves boom started. They have grown between Rs 600 crore and Rs 1,650 crore each year since then.

The reasons for the decay are complex, but can be seen most clearly from one stark fact: India's galloping imports have shot uncontrollably ahead of its export earnings. Savings sent home by Indians working abroad - which can be taken as a form of export earnings, from the export of labour and skills - aren't any longer enough to close the yawning gap as they were till last year. All the pointers suggest that unless the Government moves fast, things will probably get a lot worse before they begin to get better.Villain: The villain of the piece is petroleum. Back in the '60s, India's import bill was saddled with enfeebling food imports. Today, with oil exporting countries cutting back production and hiking prices. India is counted among the worst hit.

It buys more than 60 per cent of its needs at prices which are around 2,000 per cent of their 1973 level. Before that, India made do with a petroleum import bill of about Rs 200 crore. Currently, the projection for 1980 is that it will have to import crude oil and refined products worth around Rs 5,000 crore. At this level, this one item alone will soak up more than 75 per cent of the economy's projected export earnings in 1980-81.

The basic fact is that India hasn't as yet enough proven crude oil reserves to step up production and reach self-sufficiency. It can trim a bit here or economise a little there, but it must import. Regrettably the import bill is being loaded with other items which could be produced at home and, indeed, were even being exported a few years back. The producers of most of these blame their woes on the shortage of power, saying that if they could get enough electricity, they wouldn't have needed to import anything.

The steel industry, for instance, is a prime example of their turnaround. In 1976-77 India exported 1.4 million tonnes of it earning about Rs 360 crore. (At the same time, it bought some sophisticated varieties abroad which it didn't make at home.) In an entirely avoidable contrast, steel imports were exactly that figure, 1.4 million tonnes, in 1979-80 but bought at a much higher cost of Rs 470 crore.

Static Production: The turnabout is easily explained by matching growing demand with static production. Last year's production of saleable steel was little more than six million tonnes, about the same as seven years earlier. An official in the Steel Authority of India Ltd said that power and coking coal shortages cost the industry about 1.1 million tonnes of production. And, there's another 600,000 tonnes of unfinished steel lying about the stockyards for want of electric power. "We wouldn't have needed imports last year if there had been enough power," he said ruefully.

Not surprisingly, stagnation isn't a monopoly of the steel mills. The coal mines, source of the most important fuel in the economy, have hardly moved forward in four years. Production has been stuck at about 101 million tonnes since 1976-77, rising slightly in 1979-80 but still about 15 per cent short of demand. Year after year, targets have been slashed as the nationalised industry has failed to deliver. Result: India, which has enough coal reserves to last it more than 1,000 years at current consumption levels, turned from exporter to net importer.

In 1978 orders went out to buy 1.2 million tonnes of coking coal worth about Rs 60 crore from Australia and Canada. At the same time, exports to customers like Bangladesh were stopped. Potentially big buyers like South Korea, which has one of the fastest growing steel industries in the world, are being turned away. More important, instead of replacing imported petroleum as an industrial fuel, the shortage of coal has actually encouraged industries to use petroleum fuels rather than rely on uncertain coal supplies, with predictably disastrous results on the economy's import bill.

Power Shortage: The coal mines also point their finger at power shortages to try and explain their miserable performance. Energy Minister A. B. A. Ghani Khan Choudhuri recently told Parliament that 4.5 million tonnes of more coal would have been produced in the second half of 1979 if there had been enough power. Worker absenteeism cost the country another three million tonnes in the same six months, he said.

One industry which can justifiably take refuge behind power shortages is aluminium. Unfortunately, it is also one of the worst offenders when it comes to burdening the import bill. India's six aluminium smelters have enough capacity to produce enough for its own needs and leave a margin for export. But starved of electricity, two smelters are shut down and the rest are working at a fraction of their capacity. As a consequence, in 1980-81 India will need to import 135,000 tonnes of the metal to add to its own anticipated production of about 215,000 tonnes. The cost: more than Rs 250 crore at current prices.

Like coal, India has more than enough reserves of bauxite ore which is refined to produce aluminium metal, to satisfy its own needs and emerge as one of the world's major exporting nations.

Staggering as they are, these figures pale in comparison with the burden of edible oils. Though India is the world's largest producer of oilseeds, cropping more than one quarter of the world's total produce, it has emerged as the world's number one buyer of edible oils such as mustard oil, palm oil and soyabean oil. Compared with a demand of about 3.7 million tonnes, local supplies will be only 2.7 million tonnes. The gap of one million tonnes in 1979-80 (the oil year runs from November to October) will be covered through imports worth at least Rs 600 crore.

World Demand: Oilseeds, grown mainly on unirrigated lands from traditional rather than high yielding seed varieties, are a classic case of neglect. The world market in the commodity is booming, yet India's peak production in 1978-79, of about 10 million tonnes was only a shade higher than the 9.3 million tonnes harvested in 1970-71.

In addition to this tale of woe, is the project of importing two million tonnes of cement worth over Rs 140 crore. The production for 1979-80 is estimated at 21.2 million tonnes as against an estimated 25 million tonnes. This industry is again a victim of short power supply. Also, the sluggish expansion of capacity in recent years is due to the uneconomic retail price pegged by the Government.

Ironically, the lessons learnt from the food imports of the '60s have been forgotten all too soon. When the Indian Government signed its first concessional food import agreement under the United States Public Law 480 (PL-480), it pulled the rug from under the wheat farmers' feet. With food pouring in cheaply from abroad, nobody felt the need to confront scientific and metereological unknowns and stimulate production at home.

Lesson: It look two consecutive droughts in the mid '60s, and a humiliating import of more than 10 million tonnes in 1966-67 to drive home the need to become self-sufficient. Result: just 11 years after its record imports, India became a net exporter of rice and wheat.

It's one thing to import to meet a sudden need, quite another to make a habit of it. Instead of taking the cue from food, successive governments have chosen the soft option for other commodities: import and let production suffer. Coal, steel, edible oils and aluminium will add about Rs 1,400 crore to the import bill. Fertilisers will top this up with another Rs 500 crore to Rs 600 crore, so that the largely avoidable bulk import of just five commodities apart from petroleum will cost a shocking Rs 2000 crore.

The most optimistic estimates of India's exports for 1980-81 are around Rs 6,500 crore, which will be swallowed effortlessly by petroleum, edible oils, fertilisers, steel and aluminium imports. To buy machinery for investment and capital goods to speed up economic development, paper, cement, raw materials and the rest of its imports, India will have to use up the Rs 2,500 crore or so Indians working abroad send home in savings, and dig into its reserves.

Inevitably, it will be pushed towards higher foreign aid, increasing once again its dependence on the goodwill of donor countries. If that happens, it will be a sad retreat from just a few years ago when foreign aid had become an inconsequential part of India's foreign exchange resources.

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